I would like to thank the Chairman on the Finance Committee and the members of the Council for this opportunity to speak with you this morning. My name is Hermann Mazard, I currently teach a graduate course on innovation at Polytechnic Institute of New York University and I am the CEO of a technology startup, HomeShop Technologies, Inc.

My company, HomeShop, has developed the framework for a digital grocery list. Our goal is to create a tool that allows consumers to save time in the grocery store, reduce impulse shopping and eliminate unnecessary trips. We are staunch advocates of the home-cooked meal and given the high concentration of foodies in the metropolitan region, New York would be an ideal location in which to deploy our technology. I am here today because I question the City’s commitment to technology entrepreneurs. And I am not alone.

Over the last six months, there has been a mass exodus of entrepreneurs who have found it increasingly difficult to grow a technology business in New York City. Lack of capital is often cited as the primary reason but the real problem in New York is a lack of structure for attracting and retaining investment capital at the stages needed most. Specifically, at the seed stage.

Historically, federal government has been able to create liquidity for technology investments by lowering the capital gains tax. This tool was instrumental in fueling the flight of capital from the bond market to the stock market; it was also a factor for attracting venture capital and IPO investments during the late 1990s. But times are different now. Manipulating the capital gains tax rate alleviated a bottleneck at the growth & expansion stage of technology development. Today, that bottleneck exists at the seed stage and early stage of development. Because investing at this stage involves more risk, there needs to be greater proximity between investors and entrepreneurs. In other words, there is no federal program that can address this issue, it has to be done at the state and local level.

Silicon Valley is often referred to as the model for innovation but there are successful technology communities in many other cities including Boston, Austin (TX), Denver & Philadelphia. What these cities have in common is (a) a partnership between the private sector, the university system and government and (b) a robust investment community. New York City has the former, not the latter. The City is home to only seven venture capital firms, of which only two are nationally recognized and actively investing. The City also has only three angel investment funds, of which only one is actively investing. The concentration of capital in the hands of so few investors creates a death-trap for any entrepreneur looking to raise capital, especially at the seed and early stage of development. This is why we are leaving. More competition is needed to create a robust investment community. If the goal of members gathered today is to turn the Big Apple into an orchard of innovation, I urge the City Council to address the barriers to attracting and retaining investment capital at the seed and early stage of development.

New York City is the financial capital of the world and the resources to build a robust investment community already exist within the city limits. That capital, however, exists on the sidelines earning a low rate of interest as it waits for the next “bubble” to emerge. For many years, New York investment houses have made a name for themselves by trend-surfing and riding investment waves. There is one more wave left to be surfed in the form of energy-investing and sustainability-investing as a result of federal stimulus programs. But that does little to create opportunities for the 95%+ of entrepreneurs who have neither experience nor training in solar energy, sustainable farming or wind-turbines.

What is needed is an investor literacy program that empowers high net worth individuals with an appetite for risk to effectively evaluate the merits of a business plan. The shutting down of the IPO markets coupled with the private sales of social media companies has reduced the public disclosures about new revenue sources and business models. The net result has been a widening of the education gap between investors in-the-know and those out-of-the-loop. An investor literacy program can change that; a curriculum has already been developed by the Kaufmann Foundation, which promotes the development of angel investment funds. Such a program could easily be administered in partnership with NYU, SUNY Levin or the CUNY system. It would be an essential first step in broadening the base of investors in New York City startups.

What is also needed is a tax incentive to attract investors, such as the seed stage tax credit implemented in over 20 states nationally. NYC’s QETC tax credit attracts investors to companies that are post revenue but this not where the bottleneck exists. In fact, there is adequate investment capital available at the Series A & Series B stage for companies that generate revenue. Where the incentive is needed is at the seed or angel stage where entrepreneurs are proving the viability of new business models. This program, sometimes called a High Tech Investment Tax Credit or Angel Investment Tax Credit creates liquidity at the earliest stage of investing. Implementing such a program in New York City would go a long way in creating jobs and re-energizing the local economy.

I spent time speaking about what the City Council should consider; if time permits, I would like to spend a minute talking about what doesn’t work. As much as we need the money, entrepreneurs could not in good conscience accept a direct investment from the City. State-sponsored investment programs don’t work because the interests and risk appetite of the municipality may not be aligned with that of the entrepreneur or his/her investors. Too much oversight and the investment vehicle becomes vulnerable to patronage and corruption; too little oversight and it becomes vulnerable to krony-ism with the private sector. A so-called “public option” in technology investing may have seemed like a romantic idea. But the interests of the City are better served by building a robust base of private investors rather than trying to beat the venture capital community at their own game.

That having been said, there are gaps in the funding universe where a public option would continue to prove helpful. This gap exists for immigrant entrepreneurs, women, blacks and Hispanics. Refocusing the City’s direct investment programs (micro-lending, seed fund, pension investing) to groups that have historically had limited access to capital would level the playing field and create a technology sector that is more reflective of New York’s diversity.

I would like to conclude by saying that New York City is the greatest city in the world. One source of our greatness, that is rarely talked about, is the high concentration of churches, synagogues, mosques and temples within the five boroughs. What it tells me is that faith lives in Gotham City. Well, innovation is as much about faith as it is about technology; given the City’s religious leadership, there is no reason why we should rank behind Boston, Denver or San Francisco in any category much less believing in its people and our believing in ourselves.

Thank you again for the opportunity to speak frankly today. I strongly believe that the key to solving the capital issue is to address the structure of the investment landscape. I am available to answer any questions and look forward to working in partnership with you as we turn the Big Apple into an orchard of innovation.

Erik B. & Rakim penned the lyrics “it’s not where you’re from but where you’re at” but I disagree, especially as it pertains to innovation. Where you’re from matters! History matters! Entrepreneurs who demonstrate a thorough understanding of historical innovations are the ones best positioned to guide the next generation of commercial ideas. I tend to think that I am one such entrepreneur. In the interest of praising history, the following is my salute to:

GREAT MOMENTS IN BRAND MANAGEMENT HISTORY

1883 – Kroger acquires independent general stores to form the first grocery chain

My name is Hermann; welcome to my blog. to start reading, click here I am a serial dreamer, a first time entrepreneur, a part-time professor and a full time confused individual. My father was a doctor, my mother taught high school French, I am the middle of three children and ... Continue reading →